Work in Process (WIP) Inventory: How to Calculate, Value, and Control It
Every manufacturer has money sitting on the shop floor.
Material has been issued but not yet turned into a finished product. Labor has been spent on jobs that have not shipped. Parts are out at the plater, in a queue in front of the CNC, or half-assembled on a bench.
That is work in process, and on most balance sheets it is the inventory number people trust least.
Raw materials can be counted on a shelf. Finished goods can be counted in the warehouse. WIP is spread across open jobs, work centers, and outside vendors, and its value depends on whether material issues, labor, overhead, scrap, and completions were all recorded correctly and on time.
When they are not, WIP becomes the place where costing errors go to hide.
This guide explains what WIP inventory is, how to calculate it for the plant and for a single job, the journal entries behind it, how process manufacturers use equivalent units, and how to keep the WIP balance accurate enough to manage the business with.
What Is Work in Process Inventory?
Work in process (WIP) inventory is the value of partially completed products: material, labor, and overhead that have been committed to production but not yet turned into finished goods.
Manufacturing inventory moves through three stages:
- Raw materials are purchased components and ingredients that have not been issued to production.
- Work in process is anything that has entered production and is not finished.
- Finished goods are completed products that are ready to sell.
WIP is a current asset on the balance sheet. It is not an expense yet. Its cost moves to finished goods when the job is completed, and to cost of goods sold when the finished product is sold.
You will also see the term work in progress. In everyday manufacturing use the two mean the same thing. Some accountants reserve “work in progress” for long-running projects, such as construction or engineer-to-order jobs that span months, but the accounting idea is identical.
For how WIP fits alongside raw materials and finished goods operationally, see our guide to manufacturing inventory management.
What Goes Into WIP
A WIP balance is built from four kinds of cost:
- Direct materials issued to a job or production order, whether picked to the job, issued at an operation, or backflushed at completion.
- Direct labor reported against the job’s operations.
- Manufacturing overhead applied to the job, usually through a rate per labor hour, per machine hour, or per unit.
- Outside processing such as heat treating, plating, or coating performed by a vendor while the job is still open.
What leaves WIP matters just as much:
- Completions move cost to finished goods, or to a subassembly that will be consumed by a parent job.
- Scrap moves cost out of WIP to a scrap or loss account, or stays with the good units, depending on whether it is normal or abnormal.
- Variances are cleared when the job closes, if you cost at standard.
If any one of those movements is missing, late, or posted to the wrong job, the WIP balance is wrong.
How to Calculate WIP Inventory
At the plant level, WIP is calculated with a roll-forward:
Ending WIP = Beginning WIP + Manufacturing costs added − Cost of goods manufactured
Where:
- Manufacturing costs added = direct materials used + direct labor + manufacturing overhead applied during the period
- Cost of goods manufactured (COGM) = the cost of everything completed and moved to finished goods during the period
Worked Example
| Line | Amount |
|---|---|
| Beginning WIP | $120,000 |
| Direct materials used | $310,000 |
| Direct labor | $95,000 |
| Manufacturing overhead applied | $140,000 |
| Total manufacturing costs added | $545,000 |
| Cost of goods manufactured (completed this month) | ($580,000) |
| Ending WIP | $85,000 |
$120,000 + $545,000 − $580,000 = $85,000.
The formula is useful as a check. It does not tell you which jobs make up the $85,000, and it is only as good as the inputs. For that, you need WIP by job.
Calculating WIP for a Single Job
In a job shop or make-to-order plant, the meaningful WIP number is the sum of costs charged to each open job.
Take a job for 100 machined housings that is partway through its routing:
| Cost charged to the job | Calculation | Amount |
|---|---|---|
| Material issued | Bar stock and hardware picked to the job | $4,200 |
| Direct labor | 18 hours × $32.00 | $576 |
| Overhead applied | 12 machine hours × $45.00 | $540 |
| Outside processing | Anodizing, received back from vendor | $350 |
| WIP balance for this job | $5,666 |
Add up every open job and you have job-level WIP. That total should agree with the WIP account in the general ledger. When it does not, something was posted to the ledger without a job, or to a job without the ledger.
Job-level WIP is also where margin problems become visible early. If this job was quoted at $60 a unit and is already carrying $56.66 per unit with two operations left, you want to know now, not after it ships. Our guide to job costing in manufacturing ERP covers that side in more depth.
WIP Journal Entries
The accounting follows the physical flow:
| Event | Debit | Credit |
|---|---|---|
| Material issued to a job | WIP | Raw materials inventory |
| Labor reported against a job | WIP | Wages payable or applied labor |
| Overhead applied to a job | WIP | Applied manufacturing overhead |
| Outside processing received | WIP | Accounts payable or accrued receipts |
| Job completed | Finished goods inventory | WIP |
| Finished goods sold | Cost of goods sold | Finished goods inventory |
If you use standard costing, the completion entry moves the job’s standard cost to finished goods, and the difference between actual and standard is recognized as a variance when the job closes. See our explanation of manufacturing cost variances for how those are calculated and read.
When production and accounting run in separate systems, these entries are often made in summary at month-end. That is the root of most WIP surprises: the ledger is updated in a batch, from data that was already days or weeks old.
WIP in Process Manufacturing: Equivalent Units
Process manufacturers, such as food, chemical, and plastics producers, usually do not track cost by individual job. Cost accumulates by process or department, and units in WIP are partly complete.
To value them, process costing converts partially complete units into equivalent units.
Example: a mixing department starts 1,000 units this month. 800 are completed and transferred out. The remaining 200 are in WIP, and they are 50% complete for conversion costs (labor and overhead). All materials are added at the start of the process.
- Materials equivalent units: 800 completed + 200 in WIP at 100% = 1,000
- Conversion equivalent units: 800 completed + (200 × 50%) = 900
If materials cost $20,000 and conversion cost $9,000 for the period, the cost per equivalent unit is $20.00 for materials and $10.00 for conversion. Ending WIP is valued at (200 × $20.00) + (100 × $10.00) = $5,000, and the 800 completed units carry $24,000.
The weakness is the percent-complete estimate. If nobody records where a batch actually is, someone guesses at month-end, and the guess drives inventory value.
WIP Turnover and Days in WIP
Two simple measures show whether work is flowing or piling up.
WIP turnover = Cost of goods manufactured ÷ Average WIP
Using the example above, average WIP is ($120,000 + $85,000) ÷ 2 = $102,500. If that month’s COGM of $580,000 were typical, annual COGM would be about $6.96 million, and annual WIP turnover would be about 68 times.
Days in WIP = Average WIP ÷ Daily cost of goods manufactured
At $580,000 a month, daily COGM is about $19,070 (using 365 days a year), so $102,500 of average WIP represents roughly 5.4 days of production.
Watch the trend more than the number. Rising days in WIP usually means jobs are waiting: for material, for a bottleneck work center, for an outside vendor, or for someone to close them.
Why WIP Balances Go Wrong
Most WIP problems come from timing and discipline, not from the formula:
- Material consumed but never issued. Operators pull stock from the floor without a transaction, so raw material looks overstated and WIP understated.
- Backflushing on stale BOMs. Components are relieved at completion based on the bill of materials. If the BOM is wrong, so is every backflush.
- Labor reported late, or to the wrong job. Paper travelers rekeyed at the end of a shift or week push cost into the wrong period or the wrong job.
- Overhead rates nobody has revisited. An overhead rate set years ago keeps applying cost that no longer reflects the plant.
- Scrap that is never recorded. The cost stays in WIP, attached to units that no longer exist.
- Jobs that are never closed. Finished work stays in WIP, or small residual balances accumulate on jobs that shipped months ago.
- Outside processing in limbo. Parts are at a vendor, but the system does not know whether they are in WIP, in transit, or received.
How to Control WIP
Accurate WIP and low WIP are related goals. Less work on the floor is easier to track, and it frees up cash.
- Release work against capacity, not just demand. Releasing every job the moment it is planned floods the floor. See our guide to production scheduling and our article on capacity planning.
- Record transactions where the work happens. Material issues, labor, scrap, and completions reported at the work center are more accurate than anything rekeyed later.
- Review a WIP aging report. Any job open well beyond its planned lead time is either stuck or finished and unclosed.
- Close jobs promptly. Set a rule, such as closing within a few days of final completion, and report residual balances.
- Track outside operations as operations. A vendor step should appear on the routing, with a purchase order tied to the job.
- Revisit overhead rates at least annually. Compare applied overhead to actual overhead every month, and investigate large differences.
A Month-End WIP Reconciliation Checklist
- Run a list of all open jobs with their WIP balances.
- Compare the total to the WIP account in the general ledger. Investigate any difference.
- Flag jobs with no activity in the last 30 days.
- Flag jobs that are fully completed but still open.
- Confirm that outside processing receipts have been recorded for parts returned by vendors.
- Confirm that scrap reported on the floor has been recorded against the right jobs.
- Compare applied overhead to actual overhead for the month.
- For process operations, confirm the percent-complete estimates for batches still in process.
- Close completed jobs and review the variances they release.
If this takes days instead of an hour, the problem is usually the systems, not the people doing it.
How ERP Keeps WIP Accurate
WIP is accurate when every production event updates inventory, the job, and the general ledger at the same time.
In a manufacturing ERP, issuing material to a work order moves it from raw materials to WIP. Labor and machine time reported from the floor post to the job as they happen. Completions move cost to finished goods. Nobody has to reconcile a production system to an accounting system, because there is only one.
How Bizowie handles it: In Bizowie Cloud ERP, every production event updates inventory, costing, and the general ledger at the same time, with no batch updates or imports. Labor and machine time are recorded from the shop floor and applied as direct costs, using actual or standard costs. Third-party processing and work in progress are managed inside the work order, and the work center dashboard shows each work center’s current load, WIP, and inbound jobs. Lotted and serialized material is picked by barcode, so traceability is maintained from purchase order to sale.
For the bigger picture, see our manufacturing ERP software buyer’s guide and our guide to work order management.
Frequently Asked Questions
Is work in process inventory an asset?
Yes. WIP is a current asset on the balance sheet, alongside raw materials and finished goods. Its cost becomes an expense, as cost of goods sold, only when the finished product is sold.
Is WIP included in cost of goods sold?
No. Cost of goods sold includes only the cost of finished products that were sold during the period. Costs still in WIP stay on the balance sheet until the work is completed and sold.
What is the difference between WIP and finished goods?
WIP is product that has entered production and is not finished. Finished goods are completed products ready to sell. Cost moves from WIP to finished goods when a job or batch is completed.
How do you calculate ending WIP?
Ending WIP equals beginning WIP plus manufacturing costs added during the period (materials, labor, and overhead), minus the cost of goods manufactured. For a single job, it is the sum of all material, labor, overhead, and outside processing charged to the job and not yet relieved.
How often should WIP be counted or reconciled?
At minimum, reconcile job-level WIP to the general ledger every month. Physical verification of WIP, checking that jobs shown as open are actually on the floor at the stated operation, is commonly done at year-end or on a rolling cycle.
What is a good WIP turnover ratio?
It depends heavily on the type of manufacturing. A repetitive assembly line may turn WIP many times a month; an engineer-to-order shop with long jobs may turn it a few times a year. The trend over time, and the comparison against your own planned lead times, is more useful than an industry benchmark.
Put Your WIP Problem in Front of Us
If your WIP number takes days to reconcile, or nobody fully trusts it, bring us the job that causes the most trouble:
- A multi-level job with subassemblies in progress.
- A job with an operation at an outside vendor.
- A job that scrapped units midway through.
- A month-end WIP balance that does not agree with the ledger.
We’ll show you how Bizowie would track it, from material issue to completion, and if the platform is not a good fit for your operation, we’ll tell you that too.
See if Bizowie is right for your manufacturing operation.